Following a recent meeting with management, we maintain our TP of RM6.05. FY18E full-year performance will be mixed, dragged by soft capital market activities but loans will be on target with surprises likely coming from lower-than-guided credit costs as asset quality is stable and unlikely to deteriorate further moving forward. Q4 results are unlikely to see uptick, dragged by shortfall from Malaysia’s NOII and Indonesia’s NII.

Loans target achievable. We understand from management that FY18E loans target growth of 6% is achievable driven by resilient retail spending and supported by pickup in corporate loans in 4Q18. Moving forward into FY19, management guided that its pipeline for corporate loans will be decent and sustainable into 1H19. We find its 6% loans growth target for FY19 to be challenging given that it is expected to be retail driven while corporate loans are likely to taper in 2H18 in line with the expected slowdown. FY19E loan mix will likely be different from 2018 as Malaysia’s loans growth will be moderating (unlikely to be in high single-digit) while loan book is expected to be driven by improved performance from Indonesia, Thailand and Singapore. Management expects Niaga’s 2019 loans to be driven by retail spending and expects the acceleration in loans to occur mainly in 2H19. Moderation in 2019 Malaysia’s loans growth will likely be from weaknesses in the property market, but management expects mortgages to maintain above industry growth.

NIM compression as guided. Margin compression is expected to be as guided (5-10bps) for FY18, with compression coming mainly from Indonesia due to the spate of rate hikes in 2018 but likely to face ~5% NIM as guided previously. Going forward, 2019 NIM is guided for a 5- 10bps compression, with pressure coming from Malaysian as new mortgage loans are coming in (new loans with lower rates). Downside pressure from Indonesia is likely to persist as we do not expect rate hikes coming in 2019 with funding pressure likely to creep up as credit demand grows in 2019. Indonesian NIM is expected to be <5% for 2019.

Asset quality stable. Management highlighted satisfactory asset quality across the board; thus, credit charge for FY18E revised from the low 50s bps to even <50bps. Indications from management are for better asset quality for the Group for 2019 with guidance of 40-50bps credit cost for ahead. Uptick in CIMB Thai’s credit cost seen recently will have no bearing for the Group’s as it had made provisions as per IFRS9 requirements at the Group level. Going forward, we estimate CIMB Thai’s credit costs (for FY19) to range at 200-230bps as we expect additional provisioning as a pre-emptive measure for FRS9 in 2020. For Indonesia, credit costs will likely range at 150-200bps as interest rates are expected to be stable going into 2019.

No change in estimates. No change to our FY18E/FY19E earnings of RM4.8b/RM4.8b based on our conservative unchanged assumptions; (i) loans growth of ~5.5%/5.2%, (ii) NIM at -10bps/-5bps, and (iii) credit costs of 50/51 bps.

TP and call maintained. Our Target Price is maintained at RM6.05 based on an unchanged PB/PE of 1.0x/12.0x with the PB at 0.5SD below its 5-year mean to reflect the on-going challenges ahead namely: (i) moderating loans, (ii) downside pressure on NIMs, and (iii) soft capital market activities. With credit charge likely to be stable and likely lower ahead coupled with undemanding valuations, we maintain OUTPERFORM.

Risks to our call are: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans and deposits growth, (iii) worse-thanexpected deterioration in asset quality, (iv) further slowdown in capital market activities, and (v) adverse currency fluctuations.

Source: Kenanga Research - 24 Jan 2019